Management Discussion and Analysis

Operations Review

Our Presence Enriches Society

The Bank is acutely aware of its position in society. We know that an isolationistic mindset has no place in the world today. Thus we wish to present key indicators that will enlighten the reader with regard to the Bank's stance vis-à-vis its place and role in society and the benefits of Commercial Bank being an integral, vibrant and contributory member of that society.

Monetary Value of Products Designed to Deliver Specific Social and Environmental Benefits

The Bank has access to various lines of credit extended by the Government and donor agencies that target loans to certain designated sectors and beneficiary groups with specific social and environmental merits under an array of refinance arrangements. Details of these refinance schemes are summarised below:

Name of the Scheme Name of the Donor Loan Tenure
and Eligibility Criteria		 Eligible Sectors No. of Loans Granted as at 31.12.2012 Value as at 31.12.2012 (Rs. Mn.) No. of Loans Granted as at 31.12.2011 Value as at 31.12.2011 (Rs. Mn.)

Agriculture and Microfinance Credit Lines    
New Comprehensive Rural Credit Scheme Central Bank of
Sri Lanka		 270 days Cultivation of agricultural crops 3,501 400.95 4,737 654.38
Kapruka Ayojana Coconut Cultivation Board 05 Years Coconut cultivation development 32 18.88 33 15.2
Tea Development Project Credit Scheme Revolving Fund Central Bank of
Sri Lanka		 Maximum of 13 Years Individuals, groups of individuals, registered companies or Tea Smallholder Development Societies (TSHDs) registered with the Chairman of the Tea Smallholder Development
Authority (TSHDA)		 22 35.28 - -
Agro Livestock Development Loan Scheme Central Bank of
Sri Lanka and Development Finance Department of Ministry of Finance and Planning		 Maximum of 5 years Small scale farmers and dairy farmers 256 55.71 1,129 169.35
Small Holder Plantation Entrepreneurship Development Programme Central Bank of
Sri Lanka		 Maximum of 05 Years Agri and allied activities including tea and rubber-based industries 126 22.90 - –

Industrial Credit Lines
Saubagya (Prosperity) Loan Scheme Central Bank of
Sri Lanka		 Maximum loan amount Rs. 10 Mn. (Rs. 20 Mn. for projects in North and East). Maximum repayment period 5 years, inclusive of a maximum grace period of 6 months. Micro, small and medium enterprises excluding cultivation, fisheries, trading, businesses, livestock and commercial building 770 806.45 678 514.90
Saubagya Micro Loans Central Bank of
Sri Lanka		 Maximum of
5 years		 Microfinance and
non-agricultural sectors 		62 10.00 – –

Monetary Value of Products Designed to Deliver Specific Environmental Benefits

Promoting Installation of Environmental Friendly Wood Working Machinery

The Development Credit Department (DCD) of the Bank, in collaboration with machinery suppliers conducted two awareness programmes for saw millers in Moratuwa and Eheliyagoda areas to educate them on better technology options viz - the band saw as opposed to the conventional circular blade saw. Around 50 saw millers attended these programmes.

We proved that by installing modern band saws, the miller's total electricity consumption could be reduced by approximately 60% and timber wastage could be reduced by 30%, which also increased timber out-put by 30%. Such economies contributed towards reduction of deforestation and the minimising of environmental pollution caused by disposal of saw dust.

The Bank granted 10 loans totalling Rs. 23.2 Mn. to implement environment friendly, technically sound and energy efficient sawing methods in saw mills during year 2012.

Raising Awareness on Environmental Friendly Automobile Painting

An awareness programme was conducted for 40 automobile spray painting industrialists in Negombo educating them on ways to operate their businesses in an environmentally friendly manner by installing eco-friendly spray booths. It was demonstrated that these spray booths helped control the emission of spray paint to the atmosphere whilst significantly improving working conditions.

Initiatives to Improve Access to Financial Services for Disadvantaged People

In the historical and conventional sense, the micro agriculturist sector was not a bankable proposition. Banks had to find a way of assisting this segment get on their feet and contribute to the country's development.

The Bank made that happen, providing financial facilities for this underserved sector.

Dedicated units have been established to cater to agriculturists and micro entrepreneurs in identified potential locations. Nine units are in operation in the country.

Details of the loans facilities granted to this sector is given below:

2012 2011 2010
No. of Groups No. of Loans Amount Disbursed (Rs. Mn.) No of Groups No of Loans Amount Disbursed
(Rs. Mn.) 		No. of Groups No. of Loans Amount Disbursed
(Rs. Mn.)
34 364 48.330 57 1,007 125.110 31 581 54.760

Extending credit to recommence economic activities in the North and the East

With the development in economic activities in the North and the East, the population who had only restricted access to formal borrowing were assisted by the Bank to recommence their business activities through the provision of funds at concessionary terms and conditions.

Year No. of Loans Granted Amount Granted (Rs.Mn.)
2010 257 8.049
2011 3,599 853.033
2012 2,597 431.812

In addition, the Bank extended finances to re-settlers in Kilinochchi and Mullaitivu districts to obtain solar powered lighting for their houses.

Initiatives to Enhance Financial Literacy by Type of Beneficiary

The Bank's Development Credit Department conducted several programmes aimed at enhancing financial literacy which is so important in equipping individuals and organisations to be able to effectively and efficiently manage and utilise their financial resources.

Description of the Programme Number of
programmes
conducted		 Target group/s Number of
participants
Programme on financial literacy and entrepreneurship development 5 Households, micro finance/self employed groups/ cultivators and SMEs including women, youth groups, lower and middle income earners 580

Overview of CSR Activities

This year too, the Bank's CSR activities concentrated on projects under three ongoing initiatives: IT and English Education, Undergraduate Scholarships and Healthcare. In all, a total of 67 projects were completed, of which 60 were undertaken in these three areas. In addition, in 2012, the Bank engaged in 7 other programmes promoting Culture & Heritage, Innovation/Invention and a few other aspects.

Branch Involvement

The identification of projects was accomplished with the assistance of our Branch Managers. These were subsequently referred to the Board of Trustees for their evaluation and ratification. Summarised below is the involvement by percentage of the Branch operations in the community development programmes concluded in 2012.

Magnitude of CSR Projects Completed

The average cost of a CSR project completed amounted to Rs. 900,000/-.

The narration below gives a snapshot of CSR activities completed and under implementation in 2012.

Education

Chairman Mr. Dinesh Weerakkody and Managing Director/CEO Mr. Ravi Dias at the opening of the Computer Lab of Killinochchi Central College, donated by the Bank

The Bank embarked on several CSR initiatives that support the development road map of the country instead of restricting such activities to its core business domain. In this connection "Education" was identified objective key enabler. The Bank's goal was to support school children and young adults of Sri Lanka regardless of their gender, race, religion or social background. Further, through this initiative the Bank expects to bridge the digital divide and to empower the upcoming generations to achieve their aspirations of a better future. Under this initiative the Bank provided numerous facilities such as fully fledged IT Labs to school children, scholarships to university undergraduates, English education to rural school children and computer facilities to children with visual impairment and like facilities to other special segments in society. Our IT education initiative and educational scholarship scheme will enable Sri Lankan children and youth and the country as a whole to face the future armed with a world class education.

IT Education

The main thrust within "Education" is supporting IT education for technical advancement and innovation, to equip children and to impart confidence amongst youth for a better future.

Deputy Chairman - Mr. K.G.D.D. Dheerasinghe (seated) with Mr. Ravi Dias, Managing Director/CEO at the opening of the 60th computer lab donated by the Bank to Tellijjawila Central College

During the year, 31 Government schools were provided IT Labs whilst 6 other IT Projects were also commissioned. These Government schools are spread across 19 districts of the country even reaching rural areas.

Other projects were conducted for Holy Cross School of Health Science, the Welikada Prison, the John Paul II Centre,the Mahiyangana Raja Maha Viharaya and the Annai Illam Children's Home.

The inaugural programme of the Commercial Bank's English education project in progress at Kiriella Madhya Maha Vidyalaya, Ratnapura

The total number of beneficiaries amounted to 25,739 students. Many other people were also beneficiaries of other IT Lab projects which are not quantified due to practical difficulties.

Ms. Priyanthi Perera, Coordinator of the Bank's CSR Trust at the opening of the computer lab at Gnanodaya Maha Vidyalaya, Kalutara, donated by the Bank

Undergraduate Scholarships

Scholarships were provided under the 'Sarasaviyata Nawa Saviyak' community initiative to support worthy undergraduates. The Bank awards 25 scholarships annually based on the recommendation of the University Grants Commission. The chosen undergraduates each receive Rs. 25,000/- per year for the duration of their degree studies. Expanding its commitment this year, the Bank also presented laptop computers to the 25 undergraduate awardees, at a total value of Rs. 1.985 Mn. 54 undergraduates received the grant during 2012. By the end of the year, 14 scholarship holders graduated from their respective universities. 40 students will continue to receive the grant in 2013.

Hon. Minister S. B. Dissanayake presents a scholarship and a laptop to an undergraduate under Bank's "Sarasaviyata Nawasaviyak" Undergraduate Scholarship Programme, in the presence of Chairman of the Bank Mr. Dinesh Weerakkody and Chairman of the Bank's CSR Trust Mr. Lakshman Hullugalle

Healthcare

Safeguarding our future requires that we continue to invest in community care programmes to enhance medical facilities at Government Hospitals. A sum of Rs. 3.53 Mn. was invested in 11 healthcare projects in 2012, of which 5 projects were with a special focus on maternity and paediatric healthcare. Trincomalee, Vavuniya, Galewela, Polonnaruwa, Elpitiya, Dambadeniya, Thirunelvely are some of the key medical facilities that benefited under the healthcare initiatives.

Chief Financial Officer, Commercial Bank and Trustee of the CSR Trust, Mr. Nandika Buddhipala donating essential medical equipment to Lady Ridgeway Hospital together with officers of the Bank's CSR Trust

Culture & Heritage

A success story will never be complete if it ignored the past. Sri Lanka has such a rich and diverse heritage. We basked in its glory and were groomed by it. It is only fair that we do our best to ensure that the future generations benefit from it. We completed the construction of a museum at the precincts of the Kataragama Kirivehera to house many valuables and artifacts that have been discovered in archaeological excavations over the years. The museum will also house a book store.

His Excellency President Mahinda Rajapaksa declares open the new museum building, donated to Kataragama Kirivehera by the Bank, in the presence of First Lady Madam Shiranthi Rajapaksa, Chief Minister of Uva Province Hon. Shashindra Rajapaksa, the Chairman of the Bank's CSR Trust Mr. Lakshman Hulugalle and the Bank's Managing Director/CEO Mr. Ravi Dias

Taking Care of Our War Heroes

In 2012, we pledged monetary assistance for one year, towards the upkeep of Attidiya Mihindu Seth Medura, a residential facility that provides professional healthcare services to disabled war heroes.

The Bank also participated in welfare programmes of Ragama Ranaviru Sevana and donated an IT Lab for Joint Services Language Training Institute, Kotmale.

The computer based language laboratory donated by the Bank to the Joint Service Language Training Institute (JSLTI) of the Ministry of Defence

Supporting Sri Lankan Invention

Commercial Bank powered the inaugural 'The Ray' award for invention, presented by the Ray Wijewardene Charitable Trust in collaboration with Sri Lanka Inventors Commission. 'The Ray' is presented in order to encourage ongoing innovation and enterprise in areas of public interest. As Principal Sponsor of this award, the Commercial Bank committed its support, including a grant of Rs. 1.0 Mn. to enable the award-winning Sri Lankan inventor Mr. Indresri Karunatilaka to commercialise his invention of the 'waveless' boat that can traverse inland waters without disturbing riverbeds.

Managing Director/CEO Mr. Ravi Dias awarding the Rs. 1 Million grant in the presence of Hon. Senior Minister Prof. Tissa Vitharana to the winner of inaugural "The Ray" award for invention, powered by Commercial Bank

Regional CSR

A decision was taken by the Trustees of the Commercial Bank Social Responsibility Trust to expand CSR Initiatives to a Regional perspective with a view to providing wider scope for understanding and assisting communities in proximity to our branches.

19 projects were carried out during the year with the highest of voluntary employee engagement. The Bank also came forward to assist the public in areas affected by floods in 2012.

A Bank official handing over relief items to government official to help flood victims in Nikaweratiya

Corruption

Business Units Analysed for Risk Related Corruption

Corruption and internal frauds are considered in all types of Operational Risk Assessments carried out by the Integrated Risk Management Department (IRMD) and other units of the Bank. Risk assessments covering all areas of banking operations are carried out on a half-yearly basis where initial assessments are carried out by the Risk Owners while the IRMD reviews and updates such risk assessments. Controls relating to the risks identified are tested by the Inspection Department.

All incidents relating to corruptions and internal frauds captured through Key Operational Risk Indicators and Operational Loss Events are analysed by IRMD on a monthly basis. These include evaluation of existing controls and action taken to avoid repetition of similar types of incidents. Any new mitigatory measures that can be used to mitigate such risks, proposed during these analyses are applied to all operating units of the Bank.

Training on Anti-Corruption Policies and Procedures

The Bank's Anti-Money Laundering Department continued to educate staff on the requirements of the Prevention of Money Laundering Act. There were no training programmes conducted in Sri Lanka in 2012. However, three such programmes were conducted in Bangladesh during 2012, which trained 32 participants from various business units.

Programme/Session Title 2012 2011
   No. of
Programmes		 No. of
Participants		 Person Hours No. of
Programmes		 No. of
Participants		 Person Hours
Sri Lanka            
Junior Executive Assistant orientation - Know your customer – – – 5 272 544
Banking Trainee 18-month refresher training - anti-money laundering – – – 3 124 217
Total – – – 8 396 761
Bangladesh            
Prevention of money laundering and terrorist financing 1 1 16 – – –
Anti-money laundering/combat against financial terrorism 1 1 8 – – –
Anti-money laundering 1 30 90 – – –
Total 3 32 114 – – –

Actions Taken in Response to Incidents of Corruption

During the year 2012, there were no incidents of corruption which were detected and brought to the notice of the Executive Integrated Risk Management Committee of the Bank via its monthly meetings by the Integrated Risk Management Department. It is the Bank's practice to table the details of such frauds at the quarterly meetings of the Board Integrated Risk Management Committee, in the event that the financial loss caused due to a fraud exceeds that of a pre-determined threshold.

Following any such event, lapses in the internal control system which led to such incidents are identified and steps are taken to avoid a recurrence. In addition, further follow-up action is taken by way of an issue of circulars to all staff to educate them and to improve the effectiveness of existing internal control mechanisms. In addition, disciplinary actions are initiated against the staff involved in such incidents.

Public Policy

Public Policy Positions and Participation

The Bank actively participates at discussions on the development of public policy. The Bank is customarily invited by the Government of Sri Lanka to submit proposals for consideration when the annual national Budget is being formulated. Further, the Bank is engaged in formulating labour policy via various forums established by the Department of Labour.

In Bangladesh, we participate in providing suggestions through trade chambers operating in the market, while the national budget is formulated. Further, the Bank participates in various surveys conducted by the Bangladesh Bank (Central Bank of Bangladesh) in the process of policy formulation with regard to banking sector.

Contribution to Political Parties and Politicians

The Bank did not fund or make contributions in kind to political parties, politicians and/or related institutions during the year under review.

A Greener Bank

The Bank is well aware of its obligations towards the environment and has taken several steps in its road map to become a 'Greener Bank'. The following are some of these initiatives:

Waste Management

Energy Management

Green IT Initiatives

  Personal
Computers		 Validators Laser Printers
New branches 105 74 42
Expansions 75 85 70
Replacements 529 100 40
Total 680 259 155

Note: Out of 40 laser printer replacements, 30 are of the dot matrix variety.

Water Management

The Bank commenced measuring the total water consumed by primary sources in 2012 and it was observed that the totals of 3.523 Mn. litres were consumed during the year. The Bank is hoping to take action to reduce water consumption via several measures. As part of its water management efforts, the Bank attempts to minimise waste and recycle waste water at its Head Office. The Head Office relies mainly on groundwater resources in order to reduce its dependence on the national water supply system.

Environmental Protection

As the Bank expands its presence, we ensure that only approved tracts of land are acquired ensuring that our activities do not disturb the equilibrium of the eco-sphere and its attendant biodiversity.

Further, the Banks duly obtains relevant approvals from regulatory authorities such as the Central Environmental Authority before commencing construction of any facility. We do not locate our branch buildings and premises close to or adjacent to legally protected areas. By doing so we ensure that we do not create any impact on biodiversity and hence do not require to take any action to avoid mismanagement or pose a threat to endangered plant and animal species.

Please refer to the Section on 'Impact on Performance Due to Climate Change' for the Bank's strategies, current position and future plans towards minimising impacts on biodiversity.

Products and Services

The Bank's 'green loans' provide concessionary funding for entrepreneurs who adopt environment friendly technologies, and ensures that clients obtain necessary environmental clearances as and when required. Qualification for lending includes the conduct of an environmental impact assessment of the project. Staff members are instructed to check on clients' compliance with these requirements during the annual credit review. During 2012, the Bank continued to support such projects in Sri Lanka.

In 2012, our Bangladesh Operation formulated and adopted a 'Green Banking Policy' in line with Bangladesh Bank's (Central Bank of Bangladesh) guideline across all operational areas side by side practicing green banking through in-house performance. This process was carried out in two phases. Under phase one of Green Banking, we have adopted a Environment Risk Management (ERM) policy. The following actions are to be taken under Phase-I and Phase-II:

Phase One

Phase Two

Description of the initiatives Results and remarks
Real Vision Image (RVI) Introduced RVI to reduce paper consumption
Energy Saving Bulbs Replaced tube lights with energy saving bulbs to reduce electricity consumption by 75%. All new branches opened/to be opened will only have energy saving bulbs.
Environment Friendly Air Conditioners Fixing energy saving (inverter type) air-conditioners at our existing outlets/locations
Solar Panel Installed a 5.4 kw Solar Power Energy system in February 2013 at our new Tejgaon branch, which is expected to reduce total electrical consumption of the branch by 20%.

Although, we are unable to quantify the impact of the above initiatives at the moment, we have made arrangements to gather and quantify the impact of the above initiatives in our future reports.

Future Outlook